Cost Allocation in Transportation. Assigning Costs on Cause-Effect Basis. Efficient pricing requires that costs be allocated correctly to the service or customer that is creating the cost (i.e., on a cause-effect basis). Not all costs are easily traceable to a given service or customer.

Presentation Transcript

Efficient pricing requires that costs be allocated correctly to the service or customer that is creating the cost (i.e., on a cause-effect basis). • Not all costs are easily traceable to a given service or customer. • Separable costs: costs that can be directly assigned • Common costs: “shared” costs

Cost structure affects pricing • Railroads utilize price discrimination (value of service pricing) • Railroads have few or no competitors in some markets • Different products have different price elasticity of demand for transportation service • Railroads charge higher “mark-ups” above VC (and thus recover more of their FC) from shippers in non-competitive markets and from high value products

Trucking firms and air freight carriers face rigorous competition in nearly every market. • Thus, trucking and air freight carriers utilize cost-based pricing across the board while product demand factors and transportation competition play a major role in railroad pricing. (This is why competitive access issue is so important to shippers.)